The strong reactions to President Donald Trump’s recent tariffs over the course of just one week were surprising, especially from the political right. Libertarians and free-market economists seemed particularly alarmed, viewing tariffs as the ultimate economic folly.
This reaction is curious since tariffs are, in essence, another form of taxation. For the United States, they might not have as much impact on consumers as one might think. This is partly because imports and tariff elasticities tend to be relatively low. More importantly, Trump’s tariffs resonate with ideas proposed back in 1776 by Adam Smith, who is often regarded as the father of free trade economics.
Smith mentioned three cases in which imposing a burden on foreign goods could benefit domestic industries.
- “The first is when some particular sort of industry is necessary for the defense of the country.”
- “The second case…is when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former.”
- “The [third] case…is when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours.”
Interestingly, Trump’s executive order, issued on “Liberation Day” (April 2nd), echoes Smith’s three exceptions in the same order.
In his executive order, Trump states that persistent U.S. trade deficits have left the defense-industrial base reliant on foreign adversaries, attributing these deficits to imbalances in bilateral trade relations. This situation is marked by differing tariff rates and various non-tariff barriers.
These exceptions are not merely about defense from Communist China; there’s also the idea of weakening the Chinese Communist Party, potentially leading to regime change, similar to what happened with the USSR under Reagan. The ideas of reciprocity and retaliation fit into Trump’s negotiation strategy quite well.
Much of the uproar during the week from the announcement to a pause seemed to suggest that Trump was disrupting a kind of free trade utopia. But, in reality, the U.S. has been facing significant tariff and non-tariff barriers for years, from both allies and adversaries.
Trump believes using tariffs can help break down those barriers, even stating, “Man, is it good for negotiation.” He noted that countries that could be hostile often plead with him to lower the tariffs, suggesting they are willing to make concessions.
Critics of Trump argue that the tariffs lead to inflation, but that’s not entirely accurate.
These tariffs add uncertainty to the economy, but aren’t inflationary in essence. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.”
There’s also a common claim that businesses will simply pass the tariffs onto consumers. That’s only part of the story. Importers faced with lower profit margins can’t just raise prices without consequence. Foreign producers seeking to stay competitive may also lower their prices.
Despite being labeled as anti-free trade, Trump’s “America First” trade approach aims to lower trade barriers. This carries some significant risks, true. However, with recent trade agreements with the UK and China, his strategy appears to be yielding positive results.
